Monetary policy should aim to reduce inflation?

Mominur Rashid Mamun: Bangladesh Bank is going to announce a new monetary policy for the current financial year to control rising inflation. On July 18, Bangladesh Bank Governor Abdur Rauf Talukder will announce the new monetary policy for the first half of the current financial year 2024-25 (July-December). However, Bangladesh Bank wants to publish the monetary policy on the website instead of holding a press conference, ignoring the long tradition. Central Bank Executive Director and Acting Spokesperson Saiful Islam has confirmed that monetary policy information will be published on July 18 at 3 pm. He said, “This is the official decision of the central bank.” He also said that it will be published on Facebook and other social media.
It is being said on behalf of the central bank that the policy of reducing the flow of money in the market will be adopted in the new monetary policy. That is, the monetary policy will be contractionary. However, no decision has been taken yet on whether the central bank’s policy interest rate will increase. Known as repurchase agreements or repos, banks have to pay more to borrow money from the central bank when interest rates rise. As a result, the flow of credit also decreases. Overall, less money goes into people’s hands.
Economists say the policy rate needs to be increased further to reduce inflation. Although this policy is not in favor of raising interest rates, the central bank. However, the upcoming monetary policy may signal a slight increase in lending rates to unproductive sectors in the market, central bank sources suggest. Central bank officials are of the view that the next monetary policy will further restrict imports in non-productive sectors or luxury sectors. Apart from this, the interest rate of loans in these sectors will also be slightly increased. This will reduce the flow of money and reduce inflation.
According to the sources of the central bank officials, the government will not be given new loans with the money printed from the central bank. At the same time, they also said that besides reducing the size of the funds that the central bank has in the form of printed money, the supply of loans will also be reduced.
Currently, the country’s inflation rate is 9.72 percent. Inflation has been targeted to be reduced to 6.5 percent in the current financial year.
The central bank will formulate monetary policy keeping this target in mind. Economists, however, say it is impossible to fall within this target.
When asked about this, the former governor of Bangladesh Bank Salehuddin Ahmed told, “Inflation will not be controlled by contractionary monetary policy alone. In this case, market monitoring is important,” he said.
The executive director of the private research institute Policy Research Institute (PRI) Ahsan H Mansoor told, “If the Bangladesh Bank can refrain from providing additional liquidity support to commercial banks and if it does not print money to meet the budget deficit, then monetary policy will work.” In this case, the rate of inflation will come down within six to nine months.
It should be noted that the monetary policy department has already held several meetings with the officials of various departments of the central bank regarding the formulation of the monetary policy in advance of the current financial year. Officials have given such advice on monetary policy in these meetings. In the light of this, the central bank initially created such a framework of monetary policy.
Officials of the central bank say that the opinion of the country’s economists is being taken for formulating the monetary policy.
It is known that the draft monetary policy may be presented in the central bank board meeting on July 16. Monetary policy will be finalized based on the opinion of the board. July 18 is the initial day of monetary policy announcement.
Incidentally, the central bank has been following contractionary monetary policy for two consecutive years to control inflation. Interest rates have been increased several times. Its price has been raised in hopes of increasing the flow of dollars. But the inflow of dollars did not increase due to invisible reasons. As a result, inflation did not decrease. On the contrary, inflation increased due to the effect of increasing interest rates and the value of the dollar.
According to the data of Bangladesh Bank, in the monetary policy of the first half of the fiscal year 2023-24, the upper limit of the interest rate has been raised to 9 percent and the policy interest rate is considered as the basis for determining the interest rate in a smart way. The interest rate of the bank was 10.10 percent in last July, which stood at 13.55 percent last April. And on April 8, due to the market-based interest rate, the interest rate of some banks went close to 18 percent.
Meanwhile, the International Monetary Fund (IMF) has recommended changes to the policy interest rate framework. Currently repo or treasury bill repurchase agreement is the policy interest rate. This rate has been increased from 4 percent to 8.5 percent. The IMF has asked the bank rate to be declared as the policy interest rate. But currently the bank rate is not very effective. Instead, the repo rate is more active. Currently the bank rate is 4 percent.